Pacific Economic Monitor (December 2020)...COVID-19 Cases in Pacific DMCs 0 ˜˚˚ ˛˚˚ ˝˚˚...

Pacific Economic Monitorwww.adb.org/pacmonitorDecember 2020

PREPARING FOR RECOVERY

SOCIAL PROTECTION AND FOOD SECURITY

Prevention of gender-based violence, and support to survivors

Support to civic welfare organizations

CONTAINMENT AND HEALTH PREPAREDNESS

ECONOMIC STIMULUS

Travel restrictions and social distancing

public awareness campaigns

As Pacific developing member countries chart a course toward a post-pandemic world, sucient provisioning for health and social protection, including for vaccine procurement and distribution, will help facilitate swift, inclusive, and sustainable recovery from the coronavirus disease (COVID-19) crisis.

Health and hygiene facility upgrades

Capacity building for health-care workers

Flexible financing from banks and provident funds

Access to COVID-19 vaccine

Agricultural support, food rations, and feeding programs for food security

Reduced education costs

Cash transfers

Subsidies for low-income

households, informal workers, and other vulnerable groups

Repatriation and financial support to citizens stranded abroad

Support for key economic sectors, particularly agriculture, fisheries, and tourism

Financing for aected businesses, including micro/small and women-owned enterprises

Quarantine facilitiesProcurement

of testing and protective equipment

Infrastructure investments

Continuity of essential public services: water, power, and transport

Unemployment support and temporary employment schemes

2 Highlights

( ) = negative, FSM = Federated States of Micronesia, GDP = gross domestic product, p = projection, PNG = Papua New Guinea.Notes: Projections are as of July 2020 and refer to fiscal years. Regional averages of GDP growth and inflation are computed using weights derived from levels of gross national income in current United States dollars following the World Bank Atlas method. Averages for the Pacific islands exclude Papua New Guinea. No growth and inflation projections for Niue.Source: Asian Development Bank estimates.

NotesThis Monitor uses year-on-year (y-o-y) percentage changes to reduce the impact of seasonality, and 3-month moving averages (m.a.) to reduce the impact of volatility in monthly data.

Fiscal years end on 30 June for the Cook Islands, Nauru, Samoa, and Tonga; 31 July for Fiji (national accounts are on a calendar year basis); 30 September in the Marshall Islands, the Federated States of Micronesia, and Palau; and 31 December elsewhere.

Asian Development Bank Projections

Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO)

© 2020 Asian Development Bank.Some rights reserved. Published in 2020.Printed in the Philippines.ISBN 978-92-9262-576-4 (print); 978-92-9262-577-1 (electronic); 978-92-9262-578-8 (ebook) ISSN 2521-6066 (print), 2521-6074 (electronic) Publication Stock No. SPR200390-2 DOI: http://dx.doi.org/10.22617/SPR200390-2

Asian Development BankPacific Economic Monitor, December 2020. Mandaluyong City, Philippines.This edition of the Monitor was prepared by Erik Aelbers, Ananya Basu, Robert Boumphrey, Jacqueline Connell, Prince Cruz, Noel Del Castillo, Edward Faber, Lily Anne Homasi, Magdelyn Kuari, Rommel Rabanal, Cara Tinio, Isoa Wainiqolo, and James Webb of the Pacific Department. Publishing production assistance was provided by Cecil Caparas.The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by ADB in preference to others of a similar nature that are not mentioned.By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area.This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) https://creativecommons.org/licenses/by/3.0/igo/. By using the content of this publication, you agree to be bound by the terms of this license. For attribution, translations, adaptations, and permissions, please read the provisions and terms of use at https://www.adb.org/terms-use#openaccess.This CC license does not apply to non-ADB copyright materials in this publication. If the material is attributed to another source, please contact the copyright owner or publisher of that source for permission to reproduce it. ADB cannot be held liable for any claims that arise as a result of your use of the material.

Printed on recycled paper

Change in consumer price index (%, annual average)

GDP Growth

Inflation

2020p 2021p

Change in real GDP (%) 2020p 2021p

1.0

(13.2)

1.0

(15.4)

1.0

(1.4)

(1.8)

(10.7)

(6.5)

2.5

1.8

0.5

2.5

(19.8)

(13.8)

(9.8)

(7.0)

(6.0)

(5.5)

(5.4)

(3.5)

(2.7)

(2.9)

0.6

0.7

2.0

(24.0) (20.0) (16.0) (12.0) (8.0) (4.0) 0.0 4.0

Fiji

Palau

Vanuatu

Cook Islands

Solomon Islands

Marshall Islands

FSM

Samoa

Tonga

PNG

Kiribati

Nauru

Tuvalu

-15

-10

-5

0

5

2016 17 18 19 20p 21p

Pacific subregionPacific islands 2020p

2021p

0.8

0.5

0.8

1.5

1.2

1.1

1.5

1.9

1.7

2.2

3.0

3.8

3.0

(2.5)

0.3

0.4

0.7

0.9

1.0

0.2

1.6

1.5

3.0

3.0

3.3

6.0

(4.0) (2.0) 0.0 2.0 4.0 6.0 8.0

Fiji

Marshall Islands

Palau

Cook Islands

Nauru

Kiribati

Tonga

FSM

Samoa

Vanuatu

Tuvalu

Papua New Guinea

Solomon Islands

0

2

4

6

2016 17 18 19 20p 21p

Pacific subregionPacific islands

ContentsInternational and regional developments 3Country economic issues 5Policy briefs: Toward a gender-inclusive response

to the COVID-19 crisis: insights from the latest census in the Federated States of Micronesia 27

Social protection and COVID-19 in the Pacific: economic inoculation to mitigate the impacts of the pandemic 33

Cost-effectiveness of a COVID-19 vaccine in the Pacific: a preliminary analysis 37

Health spending and foreign aid in the Pacific 40

Economic indicators 44

https://creativecommons.org/licenses/by/3.0/igo/https://www.adb.org/terms-use#openaccess

Gross Domestic Product Growth in Developing Asia (%, annual)

Regionalaverage

CentralAsia

EastAsia

SouthAsia

SoutheastAsia

2018 2019 2020p 2021p

–9–7–5–3–1

1357

p = projection.Source: Asian Development Bank. 2020. Asian Development Outlook 2020 Update: Wellness in Worrying Times. Manila.

Gross Domestic Product Growth (%, annual)

2021p2020p2019–10 –5 0 5 10

New Zealand

Australia

Japan

PRC

United States

Pacific DMCs

Developing Asia

World

ADB = Asian Development Bank, DMC = developing member country, GDP = gross domestic product, p = projection, PRC = People’s Republic of China.Notes: Developing Asia and Pacific DMCs as defined by ADB. Figures are based on ADB estimates except for world GDP growth.Sources: ADB. 2020. Asian Development Outlook 2020 Update: Wellness in Worrying Times. Manila; International Monetary Fund. 2020. World Economic Outlook October 2020: A Long and Difficult Ascent. Washington, DC.

COVID-19 Cases in Pacific DMCs

0

100

200

300

400

500

600

700 Papua New Guinea, 669 cases

Fiji, 42 cases

Solomon Islands, 17 cases

Marshall Islands, 4 casesSamoa, 2 cases

Vanuatu, 1 case

Country Active cases Recovered DeathFiji 7 33 2Marshall Islands 0 4 0Papua New Guinea 65 597 7Samoa 2 0 0Solomon Islands 12 5 0Vanuatu 0 1 0

COVID-19 = coronavirus disease, DMC = developing member country.Note: Data as of 1 December 2020.Sources: M. Roser, H. Ritchie, E. Ortiz-Ospina, and J. Hasell. 2020. Coronavirus Pandemic (COVID-19). Published online at OurWorldInData.org. Retrieved from: https://ourworldindata.org/coronavirus; Worldometer COVID-19 Data.

A bumpy recovery amid continued threat of COVID-19 • The global economy continues to struggle from the impact of the coronavirus

disease (COVID-19) pandemic. While some economies have rebounded in the third quarter of 2020, the continued threat of COVID-19 remains the primary concern, with governments reinstating partial containment measures to deal with new outbreaks in certain areas. The latest forecast is for a 4.4% global contraction in 2020 but for a recovery in 2021 with growth of 5.2%. The economy of developing Asia is expected to contract by 0.7% in 2020, the first regional recession in almost 6 decades. It is projected to post a 6.8% recovery in 2021, slower than the pre–COVID-19 forecast. Risks to the outlook are on the downside, depending heavily on the speed of resolving the pandemic as well as the extent of global spillovers from a weakened external sector.

• The Pacific subregion reels as the pandemic devastates its economies, which rely mostly on the external sector. From the 4.3% decline forecast in July 2020, the subregional gross domestic product (GDP) forecast for 2020 has been further downgraded. The two largest economies in the Pacific—Papua New Guinea and Fiji—are expected to suffer worse than previously forecasted. With travel bans and different forms of containment measures still in place, other tourism-dependent countries such as the Cook Islands, Niue, Palau, and Vanuatu struggle to prop up their economies. Meanwhile, smaller economies that depend on imported basic commodities are suffering from bottlenecks brought about by the pandemic. The subregion is expected to recover and grow by 1.3% in 2021, contingent on how quickly travel and trade restrictions are lifted.

• The United States bounced back in the third quarter of 2020 as the economy grew at an annualized rate of 33.1%. The jump came after a 31.4% contraction in the previous quarter as many states across the country implemented containment measures to stem the spread of the virus. Higher consumption, together with advances in business and residential investment as well as exports, drove the recovery. Nevertheless, risks remain on the downside as the number of COVID-19 cases increases. The full-year 2020 forecast remains unchanged, with the United States economy expected to contract by 5.3%. However, the 2021 recovery now appears to be slightly faster at 4.0% compared with the earlier forecast of 3.8%.

• After contracting by 6.8% year-on-year (y-o-y) in the first quarter, the People’s Republic of China recovered strongly, posting 3.2% growth in the second quarter, followed by 4.9% in the third quarter. Broad-based growth was observed in most sectors, with the manufacturing, mining, and utilities sectors growing the fastest at 6.0% in the third quarter from a year earlier. While the services sector is expected to recover further, weak domestic consumption and external sector will continue to dampen recovery. The economy of the People’s Republic of China is forecast to grow by 1.8% in 2020 and accelerate to 7.7% in 2021.

• After three quarters of recession, Japan’s economy exited recession as it posted an annualized growth of 21.4% in the third quarter of 2020 led by higher domestic and external demand. Although this exceeded expectations, the economy is still 6.0% smaller than it was a year ago. A 4.7% growth in private consumption was recorded as households spent more on cars, leisure, and restaurants; and overseas demand pushed exports up by 7.0%. Despite this, the full-year 2020 projected contraction for Japan’s economy has been further downgraded to 5.4% from the initial forecast of a 5.0% contraction. Expected growth in 2021 remains at 2.0%.

• The Australian economy plunged into a recession after its GDP shrank by 7.0% in the second quarter of 2020. The combined impact of the pandemic and government containment measures led to large drops across several economic

INTERNATIONAL AND REGIONAL DEVELOPMENTS

https://ourworldindata.org/coronavirus; Worldometer COVID-19 Datahttps://ourworldindata.org/coronavirus; Worldometer COVID-19 Data

4 Pacific Economic Monitor

Lead authors: Noel Del Castillo and Rommel Rabanal

aggregates. Closures of hotels, restaurants, and other services because of the pandemic resulted in more than 12.0% drop in household consumption and almost 18.0% fall in spending on services. The outlook remains uncertain over concerns of possible succeeding waves of the virus outbreak. The Consensus Forecast for 2020 is a contraction of 4.0% in 2020 and growth of 2.8% in 2021.

• New Zealand’s economy posted its deepest recession yet, with GDP contracting by 12.2% in the second quarter of 2020. The nationwide lockdown, implemented by the government to contain the pandemic, paralyzed business activity. Widespread declines have been recorded across indicators. Household spending declined by 12.1% with major declines in spending on services, e.g., restaurant meals, ready-to-eat food, domestic air passenger services, and recreation and cultural activities. Meanwhile, investment spending fell by 20.8% because of less construction, as well as reduced investments in plant, machinery, and equipment. The Consensus Forecast projects the economy to shrink by 5.9% in 2020 and recover by 4.8% the following year.

Mixed prospects for commodity prices as COVID-19 remains a major risk • Some commodity prices are starting to rise again, while others remain low

relative to pre-pandemic levels. Brent crude oil prices were 31.0% lower in the third quarter of 2020 (y-o-y). The revised full-year forecast for 2020 projects oil prices to drop by 32.9% compared with the 42.6% initially forecast. The duration and severity of the pandemic pose the greatest risk to the forecast. On the other hand, prices of agricultural commodities have recovered from the declines earlier in the year, with the price index growing by 6.3% in the third quarter of 2020 (y-o-y). Lower production of some edible oils and meals, strong demand for raw materials, and a weaker United States dollar were the main drivers of the recovery. Latest full-year 2020 forecasts indicate a 2.8% growth in agricultural prices instead of a decline, and steady growth thereafter.

• The average price of liquefied natural gas fell by 34.3% in the third quarter of 2020 (y-o-y). Weaker demand for natural gas has been attributable to the COVID-19 pandemic and subsequent associated global recession, although the impact has been much smaller than for oil. The price is projected to decline by 17.9% for 2020 as a whole and to continue falling over the next few years. Cocoa prices have been broadly stable in the third quarter and are expected to grow modestly by 3.0% in 2020 as global demand picks up, following the slump during the lockdown. Meanwhile, the average price of Arabica coffee was up by 22.0% in the third quarter of 2020, with growth of 17.0% forecast for the full year. Gold prices continue to advance, rising by 29.6% in the third quarter of 2020 because of production disruptions and reduced gold recycling. These are seen to increase by 28.1% for the full year.

Tourism to the Pacific remains closed, recovery time frame uncertain • As the pause in global tourism persists, Pacific destinations continue to receive

minimal numbers of international travelers. In April–September 2020, monthly tourist arrivals in the Pacific declined by 99%–100% (y-o-y). Prospects for recovery remain highly uncertain, with plans for potential travel bubbles and other similar arrangements stalled by lingering health safety issues. In the North Pacific, a planned travel bubble between Palau and Taipei,China was postponed in late October because of Palau’s concerns regarding its health system’s capacity to manage potential COVID-19 cases or outbreaks. Further, although the first stage of the trans-Tasman travel bubble was opened in mid-October—allowing one-way travel without quarantine from New Zealand to select destinations in Australia (i.e., Australian Capital Territory, New South Wales, and Northern Territory)—full implementation was delayed in view of a second wave of COVID-19 cases in Victoria. Thus, any expansion of this travel bubble to include South Pacific destinations—perhaps starting with the Cook Islands, Fiji, and Niue—is likely to be pushed back into 2021 at the earliest.

Average Spot Price of Brent Crude Oil(monthly, $/bbl)

Jan 2

018

Mar

2018

May

2018

Jul 2

018

Sep 2

018

Nov 2

018

Jan 2

019

Mar

2019

May

2019

Jul 2

019

Sep 2

019

Nov 2

019

Jan 2

020

Mar

2020

May

2020

Jul 2

020

Sep 2

020

2030405060708090

$/bbl = dollars per barrel.Source: World Bank Commodity Price Data (Pink Sheet).

Price of Export Commodities(2018 = 100, annual)

LNG

Co�ee

Coconut oilGold Phosphate

LogsCocoa

60708090

100110120130140150

2018 2019 2020p 2021p 2022p

LNG = liquefied natural gas, p = projection.Source: Asian Development Bank calculations using data from World Bank Commodity Price Data (Pink Sheets).

Tourist Departures Bound for Pacific Destinations(’000 persons, January–August totals)

Australia New Zealand

302.6 304.2 312.6

93.5

246.5282.9 278.4

66.1

2017 2018 2019 2020

Sources: Australian Bureau of Statistics and Statistics New Zealand.

COUNTRY ECONOMIC ISSUESCook Islands: a balancing act for economic recoveryLead author: Lily Anne Homasi

The Cook Islands’ tourism-dependent economy continues to be severely affected as the COVID-19 pandemic resulted in border closures that halted arrivals of visitors. With the shutdown of international travel, GDP is estimated to have declined by 7.0% for fiscal year (FY) 2020 (ended 30 June 2020) (Figure 1). Even if borders were to open in January 2021, the Asian Development Bank (ADB) anticipates that GDP would decline by 15.4% for FY2021. The contraction is expected to impact employment and household incomes, particularly for women who hold 60.5% of tourism-related jobs.

Figure 1: Cook Islands Economic Losses—Gross Domestic Product and Visitor Arrivals (year-on-year % change)

–80

–60

–40

–20

0

20

40

–20

–15

–10

–5

0

5

10

15

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020p 2021f

% %

GDP (lhs) Visitor arrivals (rhs)

f = forecast, GDP = gross domestic product, lhs = left-hand scale, p = preliminary, rhs = right-hand scale.Note: Figures are based on fiscal year ended 30 June.Sources: Government of the Cook Islands, Ministry of Finance; and Asian Development Bank estimates.

Countercyclical measures quickly deployed to relieve livelihoods and businesses. Anticipating the adverse impact of COVID-19 on the economy and people, the government quickly mobilized countercyclical measures that are supported through the Economic Response Plan (ERP) phases I (NZ$61 million, or 12.3% of GDP in FY2020) and II (NZ$76 million, or 17.7% of GDP in FY2021). The ERP is geared toward mitigating risks that are associated with the impact of COVID-19 on livelihood and businesses. They support the health system; and provide employment support and tax and credit relief for businesses, free or subsidized training, and cash grants to poor and vulnerable households. The wage subsidy channeled through employers and/or businesses (to retain workers in employment) is, by far, the single largest expenditure under the ERP, estimated at 17.9% of spending under phase I and 38.2% of that under phase II. Most support under the ERP was scheduled to be rolled out from

April to December 2020. In November, the government extended the implementation of the plan up to the end of February 2021 on the understanding that a travel bubble with New Zealand is expected to begin operations in early 2021. As of 27 November 2020, the Cook Islands has no reported cases of COVID-19. The extension to the wage subsidy recognizes that the business community requires additional funds to get itself ready for a pickup in economic activity. Although the injection from the stimulus package (12.3% of GDP in FY2020) helped to keep jobs and support some economic activity, the establishment of the travel bubble and resumption of visitor arrivals will be key to economic recovery.

Fiscal performance for FY2020 better than anticipated. The Government of the Cook Islands’ preliminary results for FY2020, released in October 2020, revealed that the fiscal deficit was NZ$11.9 million, or 2.4% of GDP, much lower than the government’s initial estimate of 12.4% of GDP (Figure 2). This is largely because income tax receipts (NZ$15.9 million) were higher than expected, and operational and capital expenditures (NZ$27.6 million and NZ$11.1 million lower, respectively) were significantly lower than expected. It is unclear whether the increase was a direct result of the stimulus package, or because of tax recovered from delayed tax returns. The smaller deficit would have less of an impact on government cash reserves, allowing some room for the government to sustain COVID-19 expenses, while it secures additional financing externally to continue to stimulate the economy and actively pursue the proposed travel bubble with New Zealand.

Figure 2: Fiscal Balances of Cook Islands

–40

–20

0

20

40

60

80

FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020p FY2021f

Revenue ExpenditureFiscal balance (ADB estimates) Fiscal balance (government

preliminary results, FY2020)

% of gross domestic product

f = forecast, FY = fiscal year, p = preliminary.Note: Figures are based on fiscal year ended 30 June.Sources: Government of the Cook Islands, Ministry of Finance; and Asian Development Bank estimates.

A larger fiscal deficit in FY2021 and need for fiscal consolidation in the medium term. The ERP phase II is seen to contribute to a high budget deficit projected at 33.1% of GDP in FY2021, with the government anticipating cash reserves to be depleted as early as June 2021. Planned public sector management reforms are geared towards enhanced fiscal performance for a smooth recovery in the


medium term. The crises in the mid-1990s and 2008–2009 helped the Government of the Cook Islands to enhance the resilience of its medium term fiscal management with the establishment and enforcement of target fiscal ratios. However, these ratios could benefit from a review, given that the impact of the COVID-19 pandemic is significantly larger than previous crises. The fiscal ratios and their thresholds should continue to be relevant and reflective of the medium term outlook that allows for short term fiscal expansion followed by medium term fiscal consolidation. For instance, increasing the debt-to-GDP threshold from the current ceiling of 35% of GDP to a reasonable threshold that provide this flexibility in the short term, but then adjust back to 35% in the medium term. The specific reforms—cash management, building fiscal buffers, enhanced monitoring of the ERP, strategic planning, and public financial management (PFM) targeted to improve domestic resource mobilization—should support overall improvements to the medium term fiscal framework in line with the government’s draft economic development strategy.

More importantly, the Cook Islands is likely to be the first Pacific island country to launch a travel bubble with New Zealand. Discussions between the two countries are advanced, with the Government of New Zealand fielding a special mission to the Cook Islands from 14 November to consult with the government and other stakeholders on the readiness of the Cook Islands to safely open up and receive tourists. The findings from the mission are expected to inform areas to be strengthened before the bubble is launched. ADB is supporting the Government of the Cook Islands, including technical assistance to the Airport Authority Cook Islands to enhance the readiness of the Rarotonga International Airport. Coordinated efforts on this by stakeholders involved is key to ensuring a quick resumption of a safe travel zone that would help to revive the economy.

Additional financing would increase public debt in the near-term. Since closing the borders in March 2020, the government has been actively pursuing avenues to sustain the economy. Over FY2021–FY2022, government financing needs are estimated at $147.8 million. The government is expected to source this funding externally, mainly from the Government of New Zealand, ADB, and the Asian Infrastructure Investment Bank.1 For many years, public net debt as a percentage of GDP2 has been low—averaging 19.7% for the period FY2016–FY2019—and well within the government’s threshold of 35.0%. With the fiscal expansion and additional borrowing, net public debt is expected to increase from 16.7% of GDP in FY2019 to 43.8% of GDP in FY2021. Although this will surpass the government’s 35% threshold, ADB anticipates net debt to wind back and stay within its fiscal targets in FY2024 and onward.

Fiscal prudence and private sector investment key for sustainability. Fiscal policy is the key instrument for the government to steer development outcomes.3 From FY2016 to FY2019, the fiscal surplus averaged 5.7%, following tax reforms in 2014. The fiscal

surpluses allowed for the creation and buildup of fiscal buffers in the stabilization fund, which reached 11.4% of GDP in FY2020. The targeting of government spending on infrastructure would not only create jobs but also improve business environment through better services in information and communication technology, transport, electricity, and water and sewage. Such targeted spending would promote private sector investment in the economy, which in turn facilitates fiscal consolidation efforts. Having a medium-term fiscal strategy that considers quality public expenditures as well as fiscal sustainability would improve long-term economic outcomes.

Endnotes

1 The Cook Islands is not a member of the International Monetary Fund and the World Bank.

2 This is net of the Loan Reserve Fund, which averaged 0.9% of GDP during the same period.

3 The Cook Islands does not have a reserve bank and uses the New Zealand dollar as its currency; hence, there is no monetary policy.

References

Asian Development Bank (ADB). 2020a. Asian Development Outlook. 2020: What Drives Innovation in Asia? Special Topic: The Impact of the Coronavirus Outbreak – An Update. Manila.

ADB. 2020b. Report and Recommendation of the President to the Board of Directors: Proposed Countercyclical Support Facility Loan to the Cook Islands for the COVID-19 Active Response and Economic Support Program. Manila.

Government of the Cook Islands. 2020a. Budget Estimates 2020/21. Rarotonga. http://www.mfem.gov.ck/images/MFEM_Documents/Budget_Books/2020-21/2020 2024_Budget_Book_1_-_Estimates_-_Final.pdf.

Government of the Cook Islands. 2020b. Financial Results for the year ending 30 June 2020. Rarotonga.

Homasi, L. and J. Webb. 2020. Impacts of COVID-19 on the Cook Islands economy: Charting a path to recovery. Pacific Economic Monitor. July.

International Monetary Fund. 2020. Cook Islands Technical Assistance Report–Macroeconomic, Financial and Structural Policies. IMF Country Report No. 20/269. Washington, DC.

http://www.mfem.gov.ck/images/MFEM_Documents/Budget_Books/2020-21/2020%202024_Budget_Book_1_-_Estimates_-_Final.pdfhttp://www.mfem.gov.ck/images/MFEM_Documents/Budget_Books/2020-21/2020%202024_Budget_Book_1_-_Estimates_-_Final.pdfhttp://www.mfem.gov.ck/images/MFEM_Documents/Budget_Books/2020-21/2020%202024_Budget_Book_1_-_Estimates_-_Final.pdf

Country Economic Issues 7

Fiji’s long wait for tourism resumption

Lead author: Isoa Wainiqolo

The tourism-dependent Pacific island nation has won praises for its handling of the pandemic. It has been more than 7 months since the last case of community transmission and the government has declared the country “COVID-19 contained.” However, the economic impact has been unprecedented, with no clear end in sight. Countercyclical fiscal and monetary policy measures have been implemented with the former constrained by the lack of fiscal space and the resultant increasing debt ratios. Monetary policy, on the other hand, benefitted from the strong foreign reserves position pre-crisis, aided by rising personal remittances. While the welfare of its populace should remain the priority of any government, fiscal policy needs to tread a fine line between providing additional stimulus to support recovery and keeping debt sustainability indicators in check.

To contain community transmission of COVID-19, the government implemented localized lockdowns, in consultation with the World Health Organization, while incoming passengers had to go through mandatory testing and 14 days quarantine in government monitored hotels. As of 7 December 2020, 35 out of the 42 confirmed cases had recovered, with 2 returning medical patients succumbing to the virus while in quarantine (Figure 3).

Figure 3: Confirmed COVID-19 Cases in Fiji

0123456789

Num

ber o

f cas

es

Week reportedWee

k star

ting

16 M

ar30

Mar

13 Ap

r27

Apr

11 Ma

y25

May

8 Jun

6 Jul

20 Ju

l3 A

ug17

Aug

31 Au

g14

Sep

28 Se

p12

Oct

26 O

ct9 N

ov23

Nov

30 N

ov

Travel Travel associated contact Border quarantine

22 Ju

n

Source: Government of Fiji, Ministry of Health and Medical Services.

Despite the easing of restrictions, economic costs continue to mount. ADB projects the economy is likely to contract by 19.8% in 2020 and may only post a minimal recovery of 1.0% in 2021, assuming tourists start returning in the second half of the year.1

Recent indicators suggest significant declines in household demand. New consumption lending declined by 24.9% in the first nine months of 2021 while value-added tax collections declined by 41.2% attesting to low trading activity. On a positive note, remittances (4.9% of GDP in 2019) have held up, increasing 7.3% in the year to October. However, the contraction in GDP, stemming largely from declines in tourism, has had a profound impact on household incomes. Given the scale of the decline, the government decided to continue unemployment support for members of the

the Fiji National Provident Fund. As of 6 November, a total of F$136 million has been paid out to 177,000 members which includes F$43.7 million in government’s contribution.2

The government announced its FY2021 (ends 31 July) budget on 17 July 2020, only 4 months after Parliament had passed an initial COVID-19 Response Budget. The impact of COVID-19 has been significant, with revenue as a percentage of GDP falling from 27.3% in FY2019 by 0.9 percentage points (pp) in FY2020 and a further 9.5 pp projected for FY2021 (Figure 4). Compared with FY2020, total revenue in FY2021 is expected to be 33.3% lower (with value-added tax collections down by 8.2% and custom duties down by 44.2%), while expenditure is projected to increase by 3.9%. The fiscal deficit is expected to increase to the equivalent of 20.2% of GDP in FY2021 from 8.2% in FY2020. Government debt is projected to increase from the equivalent of 49.3% of GDP at the end of FY2019 to 65.6% at the end of FY2020 and 83.4% the end of FY2021.

Figure 4: Fiji Fiscal Impact of COVID-19

–30

–20

–10

0

10

20

30

40

FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021


Government revenues Government expenditures

Fiscal balance of central government

FY = fiscal year.Note: From 2016, fiscal years end in July 31. Before 2016, fiscal years were based on calendar years. The FY2021 impact on revenue includes the lost revenue arising from the tax reductions undertaken by the Government of Fiji to revive the economy.Source: Government of Fiji, budget documents.

The FY2021 budget reflects hopes of a travel bubble with the major tourist source markets of Australia and New Zealand before the end of 2020. Many of the new budget measures were specifically aimed at increasing tourism competitiveness when borders reopened. A F$400/tourist travel subsidy was allocated to the first 150,000 tourists to encourage forward bookings and support a quick recovery. The government also introduced a Blue Lane initiative3 targeting yachts to dock in Fiji. Other measures aimed to simplify the tax system, reduce business operating costs by removing the service turnover tax, and ease the barriers to trade. Due to the extended border closures, most of these initiatives have so far had limited impact.

This creates a challenging environment for the government. Fiscal stimulus is still required to support business and household


incomes, but some measures may need to be unwound earlier than anticipated to ensure fiscal sustainability. Normal revenue recovery from economic growth may not be enough to support ongoing spending needs, particularly if the recent reductions in effective tax rates are not compensated with new revenue sources. In the immediate term, there is an ongoing need for fiscal support, but in the medium term, fiscal consolidation will be an important policy agenda, for example by revisiting the revenue policies and improving expenditure targeting.

It is encouraging that the Fiji Revenue and Customs Service is continuing automation of processes by rolling out a new tax information system. This is likely to further lower compliance costs for taxpayers and provide real time data for better decision-making, forecasting, and planning to mitigate the likely revenue gap during the economic recovery.

Given the fall in revenues and the need for continued stimulus, the Government of Fiji increased its external borrowings. In the FY2021 budget, 51% of gross financing is expected to be financed by external loans, much larger than in previous years. The government optimized the financing mix considering the likely impact of the pandemic on local institutions, the low foreign interest rate environment, the increased commitment of multilateral partners and the loss of foreign currency earnings from tourism.

Liquidity has also improved with the central bank noting historical levels of bank demand deposits in August after drawdown of external loans. This has resulted in low interest rates which may result in improved lending activity during the recovery phase. However, in its latest Financial Stability Review, the central bank has indicated an increasing trend of nonperforming loans over the last 5 years.4 Given the uncertainty surrounding the duration of the crisis, this may necessitate increased policy support until income levels normalize.

In the long term, the threat of climate change remains a major risk for fiscal management. Fiscal consolidation is key in creating the needed fiscal buffers to address any emerging shocks from natural hazards. Other external shocks, such as rise in oil prices, will also deteriorate the balance of payments position.

The government has been flexible in extending its support where it sees need. A cash-for-work program will be piloted in the western part of Fiji targeting informal workers—workers who would have been hit hard by the significant scaling down of that region’s tourism industry. Full recovery of tourism and the economy will require the availability and distribution of the COVID-19 vaccine. Until then, a collective effort is required from all stakeholders in Fiji to minimize the economic impacts of border closures.

Endnotes

1 The Government of Fiji released new calendar year growth projections on 24 November 2020. The economy is now forecast to contract by 19.0% in 2020 (compared with government forecast of -21.7% from July 2020), due to the agriculture sector performing better than anticipated, while contractions in the wholesale and retail trade, manufacturing, and construction sectors were lower than expected. The forecast of a recovery in 2021 was downgraded to a range between 1.6% and 8.0% (compared with government forecast of 14.1% in July 2020), due to revised assumptions on the speed of the recovery of the tourism sector. The current account deficit is now expected to deteriorate to -15.7% of GDP (compared with government forecast of -4.8% of GDP in July 2020).

2 Affected employees draw down part of their superannuation funds (general balance) first. The government will top up those who do not have sufficient general account balance. By construction, 30% of superannuation contributions are in a general account with possible withdrawals for life-cycle events, while the rest is kept in a preserved account specifically for retirement purposes.

3 It was an initiative targeting yachts who were looking for ports (given most Pacific island countries do not want to allow them in). So, if they have been out for more than 14 days since the last dock, then they are given a chance to berth provided their passengers and crew show negative COVID-19 test results.

4 In its latest Financial Stability Review published in October 2019, the Reserve Bank of Fiji says that, despite an increasing trend over the last 5 years, nonperforming loans (NPLs) have “… remained at manageable level as majority of the households’ NPLs are for housing loan which is understood to be adequately secured by properties.” The central bank had also conducted stress tests as a check on the strength of Fiji’s financial system and concluded that it can withstand a range of financial shocks.

References

Government of Fiji Ministry of Economy. 2020. Economic and Fiscal Update Supplement to the 2020-2021 Budget Address. Suva.

Government of Fiji Ministry of Economy. 2020. Economic and Fiscal Update Supplement to the COVID-19 Response Budget Address. Suva.

Government of Fiji Ministry of Health and Medical Services. 2020. COVID-19 Update: 20th November 2020. http://www.health.gov.fj/wp-content/uploads/2020/11/November-20th-Updates.pdf

http://www.health.gov.fj/wp-content/uploads/2020/11/November-20th-Updates.pdfhttp://www.health.gov.fj/wp-content/uploads/2020/11/November-20th-Updates.pdf


Leaving no one behind: a look at the plight of the vulnerable in Kiribati and Tuvalu amid COVID-19

Lead authors: Noel Del Castillo, Lily Anne Homasi, and Isoa Wainiqolo

Like many other Pacific countries, prompt travel restrictions have ensured that Kiribati and Tuvalu are two of the few countries in the world that remain free from COVID-19 infection. The potential impact of a virus outbreak in both Kiribati and Tuvalu could be catastrophic because of the general living conditions of the population, weak national health systems, and complications arising from existing public health issues in both communicable and noncommunicable diseases.

Compared with other Pacific developing member countries, the economic impacts of COVID-19 are relatively limited in Kiribati and Tuvalu (Figure 1, page 33). Tourism industries in both countries are relatively small, so job losses in the sector will be minor in comparison with the total labor force. However, with the public sector already employing a large share of the workforce, it will not be able to absorb private sector workers who lose their jobs because of business closures. Outside of public sector employment, there are few alternative private sector jobs that are available for displaced workers. Any job losses will disproportionately affect the poor and vulnerable groups because social protection programs in these countries are relatively weak. Poor households and vulnerable groups will therefore require more attention and assistance for them to overcome the COVID-19 pandemic’s impacts on household incomes.

Both countries have limited social protection for certain vulnerable groups: Kiribati has a senior citizen’s benefit, disability support allowance, and the Copra Price Scheme;1 Tuvalu has the Senior Citizen Scheme, a noncontributory old age pension, and the Disability Support Scheme. Both countries have provident funds—the Kiribati Provident Fund and the Tuvalu National Provident Fund (TNPF)—but these cover formal employees only.2 In the face of an economic crisis, workers in the informal sector shoulder the brunt of the impacts in the absence of established programs that could provide financial protection and support.

KIRIBATI

When the Government of Kiribati declared a State of Public Emergency on 26 March, it closed ports of entry to the country, imposed closures of businesses and schools, prohibited community gatherings, and embarked on public health awareness campaigns to enforce physical distancing and hygiene practices. Reduced economic activity resulted in forgone earnings for businesses and job losses for workers.

Almost 280 workers have already been laid off, and many businesses are still considering reducing employment or available hours (ADB 2020a). The Government of Kiribati estimates that 1,040 people (3.7% of the Kiribati working population of 28,158) have been affected, with 69% working in the domestic market and 31% working

overseas. Containment measures in other countries, particularly in Kiribati’s major import partners (Australia and Fiji), have also resulted in reduced supply because of the closure of nonessential services, longer manufacturing times because of reduced workforce, and logistics bottlenecks in the shipping of basic food items and construction materials. It created an atmosphere of panic buying, which adversely affected the poor and the vulnerable who are incapable of buying in bulk. Since March 2020, supply of essential foods has improved with container ships arriving in the country every month.

The pandemic has been problematic particularly for the travel industry. The tourism sector lost almost A$1 million in forgone revenue and laid off 159 workers (ADB 2020a). Three locally based international travel agencies have now closed and about 20 employees were laid off. Domestic air travel has been erratic because of the inability to source spare parts on time. Many I-Kiribati were stranded in foreign ports as governments implemented their containment measures. Those stranded included government employees on official travel, students, and overseas workers whose contracts have expired. There are 30 seafarers working on South Pacific Marine Services vessels that are stranded in Fiji and Australia, and 26 temporary contract workers in Australia that have been laid off and are unable to return home.

Most of the impacts discussed above pertain to employment in the formal sector. However, the impact of the pandemic on the workers in the informal sector is more severe in the absence of social security benefits that formal sector workers have access to. An ADB rapid assessment estimates that the informal sector in Kiribati is equivalent to 40% of the country’s labor force. About 400 individuals lost their sources of livelihood, mostly coming from the informal sector. This does not include workers in construction and other trade industries, engaged by private contractors on job availability—usually offered by the government in executing large development projects, such as the South Tarawa Water Supply and the Outer Islands Road projects. These projects were supposed to start in 2020, but have been pushed back because of the pandemic delaying the transportation of critical staff from overseas. Many in urban areas have been deprived of income, such as those working in small private businesses, roadside vendors, and fisherfolk.

To mitigate the impacts of the pandemic, the government mobilized a National COVID-19 Preparedness and Response Plan.3 This provided A$11.7 million for health preparedness measures, A$3.2 million for social protection programs, and A$0.8 million for support to overseas workers and students. Almost three-quarters of the allocation to social protection programs are channeled to assist workers who have lost their jobs (Figure 5). The government initiated a cash grant of A$360 per month across the board from June to August 2020. This support covers both resident and nonresident formal-sector workers whose employment has been terminated, suspended, or reduced. The response plan also provided support to stranded I-Kiribati workers overseas by subsidizing their accommodation and daily subsistence costs incurred by the employers. The social assistance programs of the government came in the form of financial support to students and other citizens stranded overseas.


However, a closer look at these programs indicates that they cater only to workers in the formal sector. To avail of the unemployment income support program, applicants must be a member of the Kiribati Provident Fund, while the private sector employers must be active members of the Kiribati Chamber of Commerce & Industry. Those who belong to the informal sector are not members of the Kiribati Provident Fund, and many of their employers are not members of the Kiribati Chamber of Commerce & Industry. Vulnerable groups, who depend on the income of workers in the informal sector, are at a disadvantage when informal sector workers are excluded from these programs. And while the government has allocated A$72.6 million for social protection programs (support to older persons and the unemployed) in its 2020 national budget, limited data on the vulnerable can prevent these programs from reaching them.

Another important component of the government’s response plan is the communication and awareness component, and the importance of ensuring that everyone has access to information. However, the communication strategies heavily rely on traditional mass media delivery mechanisms (mainly radio and newspaper) without taking into account that just over 40% of households have access to a radio—the primary source of information (ADB 2020a). The remaining 60% rely on word of mouth for information.

Figure 5: Social Protection Measures in the COVID-19 Response Plans of Kiribati and Tuvalu

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TuVALu

The Government of Tuvalu’s declaration of a State of Emergency on 20 March was followed by the closure of its ports of entry, prohibition of public gatherings, and temporary school shutdown—all aimed at preventing the entry and spread of COVID-19. The government approved its COVID-19 prevention plan in March 2020, even before Fiji (main entry point to Tuvalu) recorded its first case on 18 March. A taskforce was created as soon as the imminent threat of the pandemic was identified. A supplementary budget was passed in March 2020, which included A$5.7 million for the procurement of personal protective equipment, ventilators, COVID-19 testing equipment, and other supplies.4

Global travel restrictions have seriously affected the tourism-related businesses, mainly composed of accommodation providers and handicraft producers. Out of the 40 employees in the tourism sector, 17 were made redundant. While the layoffs are regrettable, the restrictions put in place are necessary as the alternative would be an overwhelmed health system unable to meet the demands of the pandemic.

Prior to the pandemic, there were about 920 unemployed women residing in Funafuti, Tuvalu’s capital (ADB 2020b). Some had started to become involved in handicraft businesses, relying heavily on international tourists and government visitors. Most of these are small and medium-sized enterprises. As the pandemic pushed the government to adopt containment and defensive measures, these businesses lost their only source of income. Hotels were also forced to lay off some of their employees, most of which are women, or reduce their working hours. With losses piling up, these businesses shifted their operations to other related ventures such as restaurants and cafés, but income is substantially smaller compared with what they used to earn before the pandemic.

Like many Pacific island countries, Tuvalu is highly dependent on imported basic commodities. As the government closed its international ports of entry, it initially fueled speculation that imported food items would no longer be able to enter the country. This created panic among consumers who rushed into shops and purchased basic commodities such as sugar, rice, flour, and biscuits in bulk. The spike in demand for these food items led to the skyrocketing of prices, to the disadvantage of those with meager incomes. It only abated after the government regulated the purchase of basic commodities by issuing food vouchers to all households. This ensured that everyone had equal access to the items and that supplies would last until the next cargo ship arrived.

The closure of schools disrupted learning, especially since the schools were not prepared to provide alternative means of delivering education at a distance. Some parents refused to allow their children to return to school when they reopened. Given the logistical constraints of interisland ferries, parents are concerned that their children might not be able to return home immediately should there be an outbreak of COVID-19 in the country. While the government continues to improve e-learning to make it a viable alternative to physical learning, it is expensive and cannot be availed of by those who have no regular income. Another challenge to e-learning is the unreliable internet connection in the country.

The government launched its Talaaliki Plan to prepare for a worst case scenario. Its proposed spending for social protection programs is almost evenly split between social assistance and social insurance (Figure 5). A huge part of the government’s social assistance program came in the form of a universal cash transfer of A$40 per person, which was paid out in April and May, providing immediate economic relief for all in the country. Meanwhile, the government’s social insurance program was carried out through the TNPF. It introduced a one-time COVID-19 payout benefit of A$500 for its members and a 3-month cash benefit payout support for workers who have been terminated or are working with a reduced wage. TNPF also offered loan restructuring and suspension of loan repayments.


The universal cash transfer program was met both with praise and criticism. It provided temporary income support to many informal workers who are not members of the TNPF. At the same time, however, critics pointed out that the A$40 cash transfer per person is inadequate to sustain the needs of every individual. The 2-month payout was provided to all Tuvaluans, including those who are receiving a monthly pension and even the more affluent individuals. The government decided to limit beneficiaries to people without regular incomes only in June. A more targeted payment specifically for vulnerable groups would have allowed for increased adequacy within the existing fiscal envelope.

Concluding remarks

Government provision of immediate economic relief is a step in the right direction, which becomes more important in an environment of weak social protection systems. Job and income losses are not spread equally, and those impacted have few other options to turn to in terms of public support. Basic social protection programs that are already in place could be further expanded and strengthened, particularly the system that helps to facilitate superannuation and unemployment payments in a timely manner. Such reform could be supported by technical assistance grants from development partners. In the face of any crisis, such as this pandemic, effective response plans must ensure that the needs of poor and the vulnerable groups are properly accounted for. In countries like Kiribati and Tuvalu, geographical remoteness and isolation create an additional hurdle to effective government response. It has limited information on where affected people are, how to assess their relative need, and how best to distribute aid.

The governments of Kiribati and Tuvalu can further improve their response packages and address fiscal sustainability issues surrounding social protection spending through better-targeted programs and, in the long term, broader and effective social protection coverage.

Endnotes

1 A subsidy which effectively serves as a large cash transfer for outer islands households.

2 Formal sector refers to employment in the public sector, including state-owned enterprises, and registered companies/businesses. The informal sector involves the people employed as casual labor, people in the villages, and those who run small business enterprises that are not formally registered with government.

3 For additional details on the broad impact of the pandemic and response of the Government of Kiribati, please refer to Homasi and Wainiqolo, 2020.

4 For additional details on the broad impact of the pandemic and response of the Government of Tuvalu, please refer to Homasi and Wainiqolo, 2020.

References

Asian Development Bank (ADB). 2020a. COVID-19 Rapid Assessment Report–Kiribati. Unpublished.

ADB. 2020b. Rapid Assessment Report 2020–Tuvalu. Unpublished.

Government of Kiribati. 2020a. National COVID-19 Preparedness and Response Plan. Tarawa.

Government of Kiribati. 2020b. National Budget. Tarawa.

Government of Tuvalu. 2020. National COVID-19 Taskforce Talaaliki Plan. Funafuti.

Homasi, L. and I. Wainiqolo. 2020. Impacts of COVID-19 on small economies–Kiribati and Tuvalu: Recasting essential reforms. Pacific Economic Monitor. July.

Addressing the economic challenges of COVID-19 in the Federated States of Micronesia and the Marshall Islands

Lead authors: Cara Tinio and Rommel Rabanal

The previous issue of the Pacific Economic Monitor explored the near-term economic outlook of the Federated States of Micronesia (FSM) and the Marshall Islands amid the COVID-19 pandemic. Further information, coupled with expectations that border closures and travel restrictions will run well into 2021, now suggests that the negative socioeconomic impacts on these economies would be more severe than initially estimated.

In both countries, the private sector is seen to experience the downturn more keenly than the public sector. Further, up to 70% of pandemic-related job losses in the FSM by the end of FY2021 (ends 30 September 2021 for both economies), and about a third of that those in the Marshall Islands, are estimated to affect women. Informal workers and small, cash-based businesses are also particularly vulnerable. The resulting losses in income will make it more difficult for households to afford their basic needs, exacerbated by shipping delays because of travel and quarantine restrictions that limit the supply of imported food and other essential commodities. ADB predicts that, by the end of FY2021, the poverty rate will rise to more than 36% of the population in the FSM, and more than one-third of the population in the Marshall Islands. Increased poverty and hardship will contribute to declines in social cohesion, including higher risk of gender-based violence (GBV). Further, prolonged local mobility restrictions will disrupt access to education and health care, affecting human capital development and long-term prospects for growth.


In response to these challenges, the governments of the FSM and the Marshall Islands have developed plans to strengthen their respective health-care systems to prepare for, and manage, any local cases of COVID-19; temporarily assist businesses and workers affected by the pandemic; and reduce the vulnerabilities of the poor, older people, persons with disabilities, and women and girls. This article will examine efforts in the FSM and the Marshall Islands to build economic resilience to the COVID-19 pandemic.

FEDERATED STATES OF MICRONESIA

In addition to a $29.0 million COVID-19 Health Action Plan, the FSM government’s countercyclical response program, to be implemented in FY2020–FY2021, includes an $18.4 million economic stimulus package (Figure 6). This package comprises: (i) the Tourism Mitigation Fund, which provides wage subsidies, social security payment and gross revenue tax rebates, and interest payment relief on business loans to qualified tourism businesses—as well as those in other sectors, subject to approval by Congress—and temporary unemployment assistance to migrant workers who have lost their jobs because of the pandemic; and (ii) concessional lending, through the FSM Development Bank, of up to $10,000 to microenterprises and up to $30,000 to small enterprises. In addition to the government’s economic stimulus package, citizens of the FSM and the United States (US) who have lost their jobs or must work fewer hours because of the pandemic are receiving temporary unemployment assistance under the US Coronavirus Aid, Relief, and Economic Security Act of 2020.

The FSM program also includes social protection programs totaling $11.3 million. These cover the following:

y a one-time $500 cash transfer to eligible low-income households, with additional benefits for those that are headed by a woman or include persons with disability or dependent older persons and children (the amount for this component will total $5 million);

Figure 6: Federated States of Micronesia Countercyclical Response Program

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GDP = gross domestic product, rhs = right-hand scale.Source: Asian Development Bank. 2020. Report and Recommendation of the President to the Board of Directors: Proposed Countercyclical Support Facility Grant to the Federated States of Micronesia for the Health Expenditure and Livelihoods Support Program. Manila.

y a food security program for community groups and low-income households, which will provide subsistence livelihood training and distribute seeds and planting and fishing materials, as well as deliver food rations in the event of any COVID-19 cases in the country ($2 million);

y small grants to civil society organizations for increasing COVID-19 awareness and preparedness, and GBV prevention, in communities ($2 million); and

y other assistance to vulnerable groups, including temporary waivers of medical expenses for older people, persons with disability, and GBV survivors; electricity subsidies and solar lamps for off-grid households in outer islands; increased community health center support for GBV survivors; and one-off cash payments to FSM citizens and students stranded abroad ($2.3 million in total).

MARShALL ISLANDS

The Republic of the Marshall Islands Coronavirus Preparedness and Response Plan, approved in June 2020, outlines the actions and resources required to (i) strengthen the health system’s capacity for enhanced surveillance, infection control, and case management, particularly in Majuro and Ebeye, the country’s largest population centers and main points of entry ($21.1 million); (ii) provide economic relief and recovery assistance to businesses adversely affected by prevailing travel restrictions ($12.4 million); (iii) safeguard the well-being of vulnerable communities and households, including those in the more remote parts of the Marshall Islands ($8.3 million); and (iv) ensure the continuity of essential services, including utilities, and support consular assistance and possible evacuation of citizens abroad ($4.0 million) (Figure 7). The plan will be implemented in FY2020–FY2021.

Figure 7: Republic of the Marshall Islands Coronavirus Preparedness and Response Plan

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GDP = gross domestic product, rhs = right-hand scale.Source: Asian Development Bank. 2020. Report and Recommendation of the President to the Board of Directors: Proposed Countercyclical Support Facility Grant to the Republic of the Marshall Islands for the Health Expenditure and Livelihoods Support Program. Manila.


The economic assistance component provides $900–$50,000 in assistance to tourism-related businesses affected by the travel restrictions, as well as to eligible enterprises that can show proof, based on their tax filings, of adverse impacts from the COVID-19 pandemic. Small and informal businesses can also qualify for assistance, though they would receive the minimum payment in the absence of supporting documentation. This component will also support the local production of fabric facemasks, hospital gowns and beddings, and virgin coconut oil that will mostly benefit women and informal workers. Finally, it seeks to assist business owners in managing their costs, perhaps via utilities discounts or guaranteed or low-interest loans, and safely resuming operations by helping to fund protective equipment and transport arrangements (in line with social distancing protocols) for their workers.

Assistance to the vulnerable involves providing monthly food baskets (comprising shelf-stable staples, e.g., rice, flour, and sugar) to each household in the more remote islands and atolls for at least 6 months, as well as fishing gear and farming tools. Further, the plan expands the Ministry of Education’s feeding program, which now provides school lunch meals 5 days a week to about 11,300 children from poor families nationwide. This component will also help expand water, sanitation, and hygiene facilities, implement gender-sensitive protocols in quarantine shelters, and support continuing children’s education.

The Marshall Islands also receives temporary unemployment assistance from the US under the Coronavirus Aid, Relief, and Economic Security Act of 2020, and is working to sustain ongoing, pre-pandemic social protection programs specifically targeting vulnerable groups. Among others, these include a special education program for disabled children aged 3–21, training programs for youth with little formal education or who cannot continue secondary education, free maternal and reproductive health services, and the national social insurance scheme.

Keeping the lights on while awaiting the “new normal”

Both the FSM and the Marshall Islands are working to fuel their economies through the crisis brought about by the pandemic. Assistance to affected businesses, whether in the form of direct cash infusions or measures to reduce costs, would help them stay operational and retain their workers. The support targeted to micro and small enterprises and informal businesses would help them adapt to challenging conditions and even capitalize on any opportunities that may arise (e.g., increased demand for face masks). The Marshall Islands’ plan can also enable businesses to safeguard their employees’ health and safety amid increased concerns brought about by the pandemic. These could have spillover effects to related sectors in the FSM and the Marshall Islands economies from which beneficiary businesses would source the goods and services used in their operations.

Meanwhile, cash payments such as those under the FSM economic stimulus package and social protection programs will help bolster consumer demand, especially among low-income households facing tighter financial circumstances, as well as the wholesale/retail trade sectors. Cash transfers to low-income households could also serve as support to informal workers affected by the pandemic. It must

also be noted that the health-related components of the FSM and the Marshall Islands plans, in building COVID-19 preparedness and response, are helping to minimize the chances of a local outbreak that will require tighter local mobility restrictions and further hamper domestic demand. (Although, as of this writing, four arrivals to Kwajalein Atoll have tested positive for COVID-19, all were under quarantine at the border following set protocols and no risk of community transmission has been identified.) Efforts to sustain education and provide livelihood training would help the youth and vulnerable communities to develop knowledge and practical skills that should benefit them in the future.

Although the expenditures necessitated by the COVID-19 response plans are estimated to have significantly increased the financing needs of both the governments of the FSM and the Marshall Islands in FY2020–FY2021, these are not expected to cause a corresponding increase in public borrowing. Grant assistance from development partners, along with governments’ own funds from domestic resource mobilization and reprioritization of expenditures, will fully cover the FSM and the Marshall Islands plans. Household rapid vulnerability assessments supported by the International Organization for Migration are helping the Government of the Marshall Islands to calibrate and channel assistance to the most vulnerable households in Majuro and Ebeye, and ADB helped to develop the social protection components of the FSM’s COVID-19 response.

Taken together, the various components of the respective COVID-19 response plans of the FSM and the Marshall Islands are expected to help position businesses and workers to benefit once border and travel restrictions are lifted. Efforts to safeguard public health, provide training and education, and protect the vulnerable will help the population to avoid the spread of disease and withstand the social impacts of the pandemic. These efforts will help the FSM and the Marshall Islands to weather the ongoing COVID-19 crisis, while laying the foundations for strong and sustainable economic recovery.

References

ADB. 2020. Report and Recommendation of the President to the Board of Directors: Proposed Countercyclical Support Facility Grant to the Federated States of Micronesia for the Health Expenditure and Livelihoods Support Program. Manila.

ADB. 2020. Report and Recommendation of the President to the Board of Directors: Proposed Countercyclical Support Facility Grant to the Republic of the Marshall Islands for the Health Expenditure and Livelihoods Support Program. Manila.

The Marshall Islands Journal. 2020. RMI’s Covid-free status ends. 5 November.

The Marshall Islands Journal. 2020. Kwaj system did its job. 5 November.

Tinio, C. and R. Rabanal. 2020. Remoteness redux: COVID-19 impacts in the Federated States of Micronesia and the Marshall Islands. Pacific Economic Monitor. July.


Keeping Nauru’s economy moving

Lead authors: Jacqueline Connell and Prince Cruz

Although COVID-19 has had a relatively mild impact on Nauru’s economy, government spending on containment, health preparedness, and keeping state-owned enterprises (SOEs) afloat was equivalent to 7.8% of GDP in fiscal year (FY) 2020, ending 30 June 2020. The FY2021 budget, announced in June, continued the government’s response to COVID-19, including through subsidizing air and sea freight services that were disrupted by COVID-19, but are critical for the nation’s supply of food, fuel, and medical equipment. With more than half of the government’s COVID-19 response expected to be channeled through SOEs, ongoing attention is needed on their performance and governance.

Nauru’s public administration and SOEs are major generators of demand. Together, they employ almost two-thirds of the labor force. Their continued operation, together with the government’s successful containment efforts, has lessened the impact of COVID-19 on jobs, and helped prevent a major economic downturn. Economic growth is estimated to have slowed slightly to 0.7% in FY2020 (from 1.0% in FY2019), making Nauru one of the few economies to avoid GDP contraction (IMF 2020).

The government’s fiscal response to COVID-19 in FY2020 focused on containment measures, including provision of quarantine facilities for international arrivals; health preparedness (such as procurement of testing equipment and personal protective equipment, and upgrade of the only hospital); repatriation of Nauruans; a stimulus “ex gratia” payment to pensioners and public employees (including SOEs); and support to Nauru Airlines (Figure 8). State-owned Nauru Airlines, the sole airline servicing the country, faced a sharp decline in passenger traffic because of containment measures. International flights were reduced to once every 2 weeks, and quarantine was imposed on passenger arrivals. The fiscal response was coordinated by a COVID-19 Taskforce, established in March.

The FY2021 budget increased funding for the national airline to maintain regular air freight services. It also introduced funding for the state-owned port authority to charter a cargo ship to reduce reliance on the one shipping company that served Nauru (Government of Nauru 2020b).

With SOEs involved in a range of commercial and noncommercial activities, contributing about half of GDP, their performance has a profound effect on the people of Nauru. High operating costs—typical in small island economies—combined with low tariffs or directives to deliver noncommercial objectives have forced some SOEs to rely on large subsidies, posing a risk to fiscal sustainability.

Subsidies to SOEs increased significantly in FY2020, rising to the equivalent of 21.0% of GDP (Figure 9). These subsidies were more than the government spent on health, education, and police combined, indicating the significant social and economic cost of subsidizing SOEs. Dividends to the government, as owner of the SOEs, amounted to only 1.3% of GDP in FY2020 and were less in the previous 2 years.

Figure 8: Nauru COVID-19 Spending

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COVID-19 = coronavirus disease, FY = fiscal year, PPE = personal protective equipment.Source: ADB estimates based on Government of Nauru. 2020. 2019–20 Final Budget Outcome. Yaren; and Government of Nauru. 2020. 2020–21 Budget and Estimates of Revenue and Expenditure, Budget Paper No. 1, Budget Strategy and Outlook. Yaren.

Figure 9: Government of Nauru Expenditure

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FY = fiscal year, SOE = state-owned enterprise.Source: Asian Development Bank estimates based on Government of Nauru. 2020. 2019–20 Final Budget Outcome. Yaren; Government of Nauru. 2020. 2020–21 Budget and Estimates of Revenue and Expenditure, Budget Paper No. 1, Budget Strategy and Outlook. Yaren; and Government of Nauru. 2019. Budget and Estimates of Revenue and Expenditure, Budget Paper No. 1, Budget Strategy and Outlook. Yaren.

SOE reform to promote fiscal sustainability should ensure the continued provision of essential services, whether by the private or public sector, while minimizing the government’s fiscal burden. In June 2019, the Public Enterprise Act, establishing a legislative framework for SOEs to be commercially successful. The act recognizes that some SOEs are directed to pursue noncommercial objectives, and establishes processes to ensure that the delivery of community service obligations does not compromise the efficient operation of SOEs.


With fishing license fees, taxation, and revenues related to the Regional Processing Centre for asylum seekers remaining strong in FY2020, the government had the fiscal space to mitigate the economic, social, and supply-chain risks of COVID-19, and still deliver a sizeable fiscal surplus. The challenge ahead is to ensure that critical services are delivered efficiently, and that private sector activities are not adversely affected. Reducing the fiscal risks posed by some SOEs will be increasingly important if government revenues decline over the medium term because of falling revenue from fishing licenses or because the Regional Processing Centre is scaled down.

References

International Monetary Fund. 2020. World Economic Outlook, October 2020: A Long and Difficult Ascent. Washington, DC.

Government of Nauru. 2020a. 2019–2020 Final Budget Outcome. Yaren.

Government of Nauru. 2020b. 2020–21 Budget and Estimates of Revenue and Expenditure, Budget Paper No. 1, Budget Strategy and Outlook. Yaren.

Niue: A travel bubble to lift fiscal pressures?Lead author: Rommel Rabanal

Beyond the well-documented impacts on Niue’s vital tourism sector, data from the FY2021 (ends 20 June 2021) budget provide further context of the COVID-19 pandemic’s impacts. Outturns for FY2020 show that revenue fell by 4.2% largely because of subdued economic activity with no tourism since late March 2020. Further, implementation of development partner-financed capital projects was stalled during the year, partly because of prevailing travel disruptions. Combined, these factors imply that a severe economic contraction occurred during FY2020. With a 4.1% increase in recurrent spending to prepare for, and respond to, COVID-19 impacts, the fiscal deficit widened to the equivalent of 4.7% of GDP in FY2020 from 1.2% the previous year.

Further, while previous budgets have usually targeted at least maintaining fiscal balance, the budget for FY2021 projects a further widening of the deficit to the equivalent of 11.2% of GDP (Figure 10). This is mostly because of a 21.2% increase in recurrent spending to sustain COVID-19 impact mitigation measures, principally for continuing operations of the Niue Power Corporation amid deferred payments from consumers. With support from New Zealand, the FY2021 budget also includes continuing COVID-19 assistance measures for health (equivalent to 1.5% of GDP), food security (0.8%), and private sector relief (3.3%), among others. This would be comparable with the 15.5% increase recorded in FY2018 when the economy grew strongly.

On the revenue side, the FY2021 budget targets a 14.0% expansion from the previous year.

During the last quarter of 2020, officials from health and border agencies of Niue and New Zealand have ramped up discussions on a potential travel bubble between the two countries. New Zealand, the World Health Organization, and the Pacific Community are all providing technical assistance to Niue to ensure that necessary systems are in place to support safe, quarantine-free travel. Establishing shared protocols for safeguarding public health that are acceptable to both parties will be a critical prerequisite for any resumption of international travel. Based on public statements in early November 2020, both the Premier of Niue and the Prime Minister of New Zealand appear confident that a travel bubble will be in place soon. Although such an arrangement would provide a welcome boost to Niue’s tourism sector and the broader economy during the latter half of FY2021, this is unlikely to translate to gains in government revenue that will be enough to stave off the expected widening of the fiscal deficit. Nonetheless, the successful implementation of a travel bubble that avoids any COVID-19 outbreaks can lay the foundation for economic recovery and a return to fiscal sustainability.

Reference

Government of Niue. 2020. Estimates of Expenditure and Revenue for Financial Year 2020/2021. Alofi.

Figure 10: Niue Fiscal Accounts, FY2015–FY2021

–12

–6

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6

12

–120

–60

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120

FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021b



Total revenue (lhs) Total expenditure (lhs) Fiscal balance (rhs)

b = budgeted, FY = fiscal year, lhs = left-hand scale, rhs = right-hand scale.Sources: Government of Niue. 2020. Estimates of Expenditure and Revenue for Financial Year 2020/2021. Alofi; and Asian Development Bank estimates.


Palau: Reforms for sustainable recovery from the COVID-19 crisisLead author: Rommel Rabanal

The economy of Palau contracted by 13.8% in FY2020 (ended 30 September 2020). This is deeper than the earlier projection of a 9.5% decline in the July 2020 issue of the Pacific Economic Monitor—reflecting even stronger-than-expected adverse impacts of COVID-19 travel restrictions on business activity and household incomes. A further decline of 13.2% is seen for FY2021 (a downgrade from the previous projection of 12.8%) with tourism unlikely to restart during this fiscal year. Reduced business activity has constrained tax collections, which declined by about 25% in FY2020 and are set for a similar fall in FY2021. With additional spending of $20 million under the Coronavirus Relief One-Stop Shop Program to mitigate the pandemic’s impacts on the private sector, a fiscal deficit equivalent to 13% of GDP was recorded in FY2020. Fiscal deficits equivalent to 24% of GDP in FY2021—in part reflecting additional spending of $12 million necessary to extend assistance measures until the end of the fiscal year—and a further 11% in FY2022 are projected over the near-term.

These deficits translate to total financing requirements of about $110 million during FY2020–FY2022, of which about $100 million will be met through new external borrowing and the balance by drawdowns from government deposits. This is seen to push Palau’s debt-to-GDP ratio to a peak of close to 80% in FY2022 (Figure 11). However, assuming economic recovery commences with a reopening of tourism in FY2022, the debt-to-GDP ratio is projected to steadily decline to the pre-COVID-19 level of about 30% by FY2030, even under conservative long-run growth assumptions.

Figure 11: Palau Projected Public Debt

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80

2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044

Pre-COVID-19 with COVID-19-related borrowing


COVID-19 = coronavirus disease.Source: Asian Development Bank estimates.

Nonetheless, with COVID-19 necessitating unprecedented levels of borrowing, it will be imperative for Palau to carve sufficient fiscal space to service its debt. Assuming new debt will be incurred under concessional terms, debt service requirements associated with COVID-19-related borrowing are estimated to reach about

$4.7 million per year after loan grace periods. On top of debt servicing of $8 million–$9 million per annum in the years leading up to the pandemic, debt service requirements are expected to increase to up to $14 million per year by FY2026–FY2027. Even if Palau’s fiscal accounts can revert to pre-COVID-19 trends—where annual surpluses equivalent to 4.0% of GDP were recorded during FY2015–FY2019—by FY2023 and onward, available resources could fall short of debt servicing requirements in some years.

To avoid sudden cuts to expenditure, which can create fiscal space but likely at the expense of forgone stimulus to the economy, Palau can consider implementing revenue-raising reforms to tax policy along with a shift to a more growth-enhancing expenditure mix that prioritizes capital spending, among others. Palau’s current tax system relies heavily on gross revenue taxes and import duties—together accounting for half of annual collections—that are inefficient, distortionary, and discourage private investment, particularly startups. During FY2015–FY2019, Palau’s tax-to-GDP ratio was 20.2%, below the 24.4%–29.0% range for other tourism-dependent Pacific countries such as the Cook Islands, Fiji, and Samoa. Further, with user fees set below full cost recovery, the Palau Public Utilities Corporation has required subsidies averaging $1.5 million per annum (2.3% of recurrent spending) in FY2013–FY2016 and again in FY2019. Similarly, Palau’s social security funds received transfers totaling $3.7 million (3.4% of recurrent spending) in FY2019, with needs seen to rise given substantial unfunded liabilities. Rising recurrent spending has translated to some offsetting reductions in capital spending in recent years.

A tax reform program that involves the introduction of a value-added tax can help boost Palau’s tax-to-GDP ratio through collection efficiency gains. Simplified simulations show that, if tax reform can raise the tax-to-GDP ratio gradually by 0.25 percentage points per year from FY2024—such that it increases by a full percentage point by FY2027 and onwards—the higher debt service requirements stemming from COVID-19-related borrowing can largely be covered (Figure 12). If combined with higher economic growth, which can result from productivity gains through prioritization of capital spending, further fiscal buffers can be generated.

Figure 12: Palau Debt Service Requirements versus Fiscal Balance, Various Scenarios

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2023 2024 2025 2026 2027 2028 2029 2030

$ million

Debt service Fiscal balance: BaselineFiscal balance: Increased tax-to-GDP Fiscal balance: Higher growthFiscal balance: Combined reforms

GDP = gross domestic product.Source: Asian Development Bank estimates.


Palau’s sound macro-fiscal policy framework, which helped achieve a rising tax-to-GDP ratio and a declining public wage bill prior to the severe exogenous shock brought on by COVID-19, can facilitate a quick return to fiscal surpluses upon economic recovery. However, further reforms will help generate additional fiscal space that, in turn, can support stronger recovery and more sustainable growth. Options include (i) tax reform that improves efficiency and equity of the tax system; (ii) reforming state-owned enterprises and social security funds to minimize the need for fiscal transfers; and (iii) prioritizing capital spending, both on timely infrastructure upgrades and regular maintenance of assets, to boost long-run productivity and growth, among others.

References

Graduate School USA. 2020. Assessing the impact of COVID-19 on the Palauan economy. Economic Monitoring and Analysis Program (EconMAP) Technical Note. https://pitiviti.org/news/downloads/EconFiscImpact_COVID-19_Mar2020_Web.pdf.

Graduate School USA. 2020. Where do we go from here? Updating the Economic Impact of COVID-19 and Strategies for Mitigation in the Republic of Palau. Economic Monitoring and Analysis Program (EconMAP) Technical Note. https://pitiviti.org/news/wp-content/uploads/downloads/2020/10/Palau_COVID_EconImpact_v2_Aug2020.pdf.

Papua New Guinea’s expenditure strategy for recovery

Lead authors: Edward Faber and Magdelyn Kuari

The COVID-19 pandemic has heavily impacted the economy of Papua New Guinea (PNG), with GDP expected to contract by 2.9% in 2020. Lockdowns, restrictions imposed on international travel, and weaker

international demand for PNG’s exports have all impacted growth. Key sectors that are affected include construction, accommodation and food services, transport, and agriculture and forestry. In 2021, growth is seen to recover to 2.5%; however, growth will remain lackluster given the anticipated continuation of the pandemic and its impact on the international economy, including movement of people.

In 2020, the government has forecast revenues to fall by the equivalent of 2.9% of GDP compared with the 2019 outcome, and the fiscal deficit to widen to 8.2% of GDP. To support financing this wider deficit and maintain stimulus, bilateral and multilateral partners are assisting PNG, including ADB ($500 million), the International Monetary Fund ($363 million), and Australia ($100 million).

Ensuring quality of expenditure is fundamental for meaningful fiscal stimulus. Supporting capital projects, such as public infrastructure, through the capital budget provides much-needed economic stimulus, but there is a need to balance this with expenditure directed toward social support and service delivery. A supplementary budget in September 2020 focused on boosting capital expenditure, which increased to K6.3 billion compared with K5.9 billion under the original budget (Table 1). Although, operational expenditure was reduced from K12.7 billion to K11.6 billion, K1.2 billion was still allocated towards the country’s response to COVID-19, including support for the health system; social programs; agricultural development and food security; micro, small, and medium-sized enterprises; and public infrastructure.

In the medium-term, the government has indicated that it will continue with its fiscal stimulus, increasing the overall share of capital expenditure. The 2021 budget projects a deficit of 7.6% of GDP in 2021, falling to 5.6% of GDP in 2022 and to 3.3% by 2023. In line with this, capital expenditure (Figure 13) remains on a growing path and is projected to reach 8.5% of GDP in 2021, compared with 7.9% of GDP under the 2020 supplementary budget, 7.2% in 2019, and 5.9% in 2018.

The Medium-Term Development Plan III 2018-2022 (MTDP III) outlines the government’s plan for capital expenditure, with

Table 1: Papua New Guinea Expenditure Summary (K million)

Details 2020 Budget 2020 Supplementary

Budget 2021 Budget Total expenditure 18,726.5 17,989.3 19,607.8

Operating or recurrent budget 12,746.0 11,599.8 12,136.7

Compensation of employees 5,672.8 5,762.8 5,763.8

Debt service (interest payment and fees and charges) 2,156.9 2,064.4 2,270.8

Other operating (goods and services) 4,916.3 3772.6 4,102.1

Capital budget or Public Investment Program 5,980.5 6,389.5 7,471.1

Government of Papua New Guinea funded 3,683.4 4,092.4 4,824.4

Donor funded 932.1 932.1 1,008.3

Loan funded 1,365.0 1,365.0 1,638.4

Note: On 9 December 2020, the National Supreme Court ruled that the parliament meeting and its decisions on 17 November 2020 were unconstitutional, including the passing of the 2021 National Budget. The parliament will decide on re-tabling of the 2021 National Budget.

Source: Government of Papua New Guinea. 2020. 2021 National Budget. Port Moresby.

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